The state of luxury e-commerce in China

For the past 2.5 years, global luxury marketplace Farfetch has operated two offices in Hong Kong and Shanghai, with a full team to service China, the company’s second largest market after the Americas. Despite that, 100 percent of Farfetch’s sales to Chinese consumers since the company launched in 2008 have been imported.

“To have access to luxury supply, a Chinese player has to deal with European companies and American companies,” said José Neves, the CEO and founder of Farfetch. “That means we haven’t had a fully localized presence in the region.”

That changed in June when Farfetch accepted an investment worth $397 million from JD.com, a Chinese e-commerce marketplace and the second largest B2C retail site after Alibaba’s Tmall. Along with that investment, which made JD.com one of Farfetch’s biggest shareholders, the two companies developed a partnership. In exchange for hosting Farfetch’s network of more than 700 brands and boutiques virtually on its platform, JD.com will drive traffic and awareness to Farfetch in China and help out with regional logistics, including same-day delivery and localized payments through services like WeChat Pay and AliPay.

Saint Laurent is the first brand to go live on Farfetch’s JD.com-powered platform in China, with online inventory sourced from local Saint Laurent stores in Shanghai, Beijing and Hong Kong. It’s the latest luxury brand to develop an e-commerce presence in China: In July, Louis Vuitton and Gucci opened directly operated online stores. Last week, Alibaba’s Tmall launched a luxury-specific platform for high-end brands like Burberry and Hugo Boss that’s restricted to high-spenders.

The regional migration marks a shift in strategy for luxury brands that historically haven’t sold products online in China. The global luxury market has slowed to a projected 2 to 4 percent annual growth through 2020, though, leading them to turn their attention to China, where the Chinese e-commerce industry is worth a staggering $785 billion. The counterfeit and gray markets (where goods bought abroad are resold online for a profit) are rampant on Alibaba and JD.com, which makes them a turnoff for luxury brands. But breaking into the local market without selling on one of these marketplaces poses a logistical challenge to outsiders.

For luxury brands looking for growth, however, the question of launching e-commerce in China is one of how, not if.

Too big to ignore
The luxury spending power of China’s wealthiest customers is critical for brands, and those shoppers are starting to prefer that brands come to them.

In the past, a vast majority of purchases were made abroad: While Chinese shoppers account for one-third of all luxury goods purchases, only 7 percent of those purchases are made at home, according to Bain & Co.’s global luxury market report for 2017. Typically, those purchases are made on trips or through daigou, a commerce channel where personal shoppers buy goods abroad and then bring them back to clients, avoiding China’s 30 to 40 percent markups on luxury goods.

Now, with recent crackdowns in China on the diagou market to limit unauthorized sales and increase domestic purchases, Chinese luxury customers are spending more in China on luxury goods than they have in the past, a trend Bain & Co. expects will increase.

“In China, consumers have started buying again in their home market, behavior that epitomizes a larger global trend: the re-localization of luxury,” said Bain & Co. analyst Claudia D’Arpizio. “As of now, that was not enough to offset a dip in purchases by Chinese travelers abroad.”

The power of the platforms
Farfetch, the most searched online luxury site in the world, has a China-based team operating out of two offices and a considerable number of Chinese customers. Still, it decided it couldn’t crack e-commerce there on its own.

“The key point is that it is very complicated to run e-commerce in China,” said Neves. “Few brands are able to do it. Saint Laurent had no online presence before in China, and very few work directly in the market.”

Neves said there are multiple factors working against foreign brands: local payments, user interfaces and customer behavior all have regional nuances that outsiders struggle to adapt to.

As a result, Farfetch has developed a separate system for developing and distributing online advertisements in the country, as materials and strategies that work elsewhere won’t work — like, for instance, a social media campaign on Facebook and Instagram, which are banned in China. It will also open a WeChat store, the social platform with 900 million active users that offers a direct selling option for brands.

Established platforms like Alibaba and JD.com, which count 550 million and 226 million active customers respectively, are the law of the e-commerce land. They know how to market to Chinese customers, they know how they shop (mostly on their mobile phones), and they have adapted to customer expectations around delivery and service.

“In China, Alibaba and JD.com are the definition of online shopping,” said Yiling Pan, associate editor of Jing Daily, a publication and consulting firm covering the luxury industry in China. “They’re very sophisticated about online shopping, when it comes to service and how customers buy. If you can’t match up to that, it’s very hard to compete.”

As part of its deal with JD.com, Farfetch can offer a white-glove delivery service that’s guaranteed for the same day. In October, it will roll out its 90-minute guarantee delivery (which it’s currently offering with Gucci in other international markets) to Shanghai, Beijing and Hong Kong. This level of service, combined with the trusted Farfetch marketplace that carries only authentic brands, has the promise to lure in luxury brands.

Alibaba’s Tmall is gunning for the same market. To assure luxury brands that they’ll be protected on its platform, its “luxury pavilion” ensures that brands will sit next to other premium brands, counterfeits are shut out and the only customers eyeing their products are ones deemed worthy by how much they spend. The minimum spending requirement is $15,000 a year, but on average, Alibaba’s top spenders purchase $45,000 worth of goods annually.

Last week, Alibaba also agreed with Kering to cooperate in protecting intellectual property and counterfeit enforcement. While Kering’s luxury fashion brands don’t sell through Alibaba, the partnership will mean that a joint task force will work together to identify and combat counterfeiters selling knockoff goods on the platform. As a result of the partnership, Kering has dismissed the lawsuit filed against Alibaba and its mobile payment service Alipay in 2015 over the sale of counterfeit Gucci and Saint Laurent goods, its two most profitable brands.

Forging an independent path
For the sake of control, some luxury brands are taking on the challenge of opening up a directly owned and operated e-commerce store: Louis Vuitton and Gucci plan to own all of their online operations in China, including marketing, shipping and delivery, and payments.

“A brand-owned sites protects them from issues like control over positioning, description, pricing and listings,” said Robel Nowell, marketing manager at the global analytics firm Brandview. “Brands that have such a strong brand image and want to maintain that are going to be wary of selling on platforms where there’s a lack of control.”

Louis Vuitton, which first began selling online in France in 2005, will sell to 12 cities in China. It’s incorporated Alipay and WeChat Pay into its service to make localized payments easier. Gucci, which previously had an online site in China and a campaign-heavy presence on WeChat, has done the same. Other brands with owned e-commerce sites in China include Burberry and Michael Kors.

For the brands, the move maintains exclusivity along with control, but logistically, they have to hit high customer standards.

“In Europe, where most luxury brands are based, the [online] experience is markedly different from China,” said Marc-Oliver Arnold, chief strategy officer at RTG Consulting Group, which is headquartered in Shanghai. “Chinese consumers expect fast delivery, and they still expect a luxury experience defined by superior customer service. It’s important that luxury brands understand these differences.”